Challenges and new models for making agricultural insurance more accessible
The Microfinance Gateway is a media partner for European Microfinance Week where Katharine Pulvermacher and Stewart McCulloch spoke at the session, "The transformative role of insurance in African agriculture." In this Gateway interview, they provide insights on some of the discussions around this issue and the challenges in scaling up agricultural insurance for smallholder farmers.
Katharine Pulvermacher is the Executive Director of the Microinsurance Network. She is a prolific writer and researcher and has written extensively on topics related to economic and social development as well as health and financial inclusion.
Stewart McCulloch has been the Global Insurance Director of VisionFund for four years. Prior to that he had a 30 year career in international insurance to CEO level. VisionFund is the microfinance arm of World Vision. It serves over 1 million clients in more than 30 countries.
Gateway: At European Microfinance Week, you were part of a session called “The transformative role of insurance in African agriculture.” Why has agricultural insurance been so difficult to sell in the past despite many efforts?
Katharine: For many people in low-resource settings, such as smallholder farmers, their first exposure to insurance is through credit-life products, purchased alongside microloans. Clients purchasing such products may not consciously be opting to buy them – they may simply be bundled with the loan – and they may not even be truly aware that they have such insurance or what it means.
Agricultural insurance brings in a bit more complexity. Typically, this insurance focuses on a single crop, whereas smallholder farmers are more likely to grow a variety of produce and less likely to specialize unless they are confident that they can secure their food supply and produce a surplus that can be sold for cash. In a context where many millions of farmers are barely producing enough to survive, a reluctance to spend money insuring against a risk that may – or may not – happen at some point in the future is entirely understandable. The tragedy of this is that those who need it most, and whose existence is most precarious, may be least able to afford the premiums charged to transfer their risk.
From the supply side, multiple factors make pricing risk accurately for this segment very challenging, and as a result, insurance providers may charge premiums that are perceived by would-be clients as unaffordable, so that ultimately the market fails.
On a more positive note, index-linked agricultural schemes to cover crop failures, typically where these are due to natural disasters and adverse weather conditions, are often fully or partially subsidized by governments, and thus overcome some of these obstacles. However, such products represent less than 10% of what is currently available on the market.
Gateway: You talked about the “transformative role of insurance” by highlighting a new insurance model developed in partnership with the VisionFund, World Vision, Global Parametrics, ACRE Africa and the Syngenta Foundation. Can you describe this model and explain how it differs from previous ones?
Stewart: African farmers often need to specialize in a particular crop or livestock to come out of poverty, to become a “bean farmer” or a “dairy farmer”. By specializing in one agricultural activity, farmers can increase income dramatically as they become more efficient and are able to scale their operations. But, specialization concentrates farmers’ risk in a particular activity. Further, to specialize successfully the farmer needs to invest in order to obtain the best inputs and techniques. This concentration of risk and the need to increase investments poses a great challenge for farmers.
Insurance is transformational in this situation in that it achieves three things:
First, it changes the farmer’s risk vs. reward equation to encourage innovation.
Second, it reduces the farmer’s credit risk, enhancing the farmer’s access to finance.
Third, farmers can partner with financial service providers because the significant concentration of risk is covered by the insurance product.
Our model brings two innovative types of insurance: 1) A Group Multi Peril Crop Insurance (GMPCI) to cover more risks for farmers; and 2) a portfolio insurance for the finance providers to ensure that credit continues to be available even in drought conditions. The key difference between the new model and the previous ones, is simple: a partnership among farmers, financial institutions, and insurance providers. Farming, Finance, and Insurance at last being integrated for the benefit of small farmers.
We have this model working with 5,000 farmers in Tanzania and are looking to double this program next year. We have funded plans to roll out to a further 6 African countries in the next 3 years targeting 200,000 farmers.
Gateway: Many agricultural insurance models in the past have failed to take off because of the low demand among smallholders. How does the new model deal with this issue?
Stewart: Insurance is sold as an enabler of positive transformation not just a protector of downside risk. Farmers need good farming inputs and techniques so they can be more successful. They also need to invest in such inputs and techniques to facilitate transformation. Insurance increases farmers’ confidence to invest as well as their ability to secure the necessary finance. As such, insurance is an enabler, not an end in itself.
Further, farmers can best afford insurance where they are undergoing the change in fortunes I describe above as well as when they are able to see insurance as an input, just like spray or fertilizer, that protects their crop. Our new model uses farmer budgeting to re-frame affordability in this way - creating a per acre budget for revenues and costs for the farmer that shows insurance alongside the other inputs such as spray. It also allows us to show how insurance protects the farmers’ profits. Insurance is then bought with the model - as a component of a holistic package that works for the farmer - not sold on its own.
Gateway: For an insurance market to function well, there needs to be a supportive regulatory environment. What are some of the key policy and regulatory challenges that are common regarding agricultural insurance?
Katharine: Progress is being made to update policies and regulations - in the past year, 33 countries implemented changes to make their insurance regulations more inclusive, and changes are underway in a further 21 countries. However, progress is not being made everywhere at the same pace.
Some of the challenges, which are also not specific to agricultural insurance but apply to microinsurance and other inclusive insurance programs, include:
The need for regulations to allow for paperless contracts to support the digitalization that can help reduce transactions costs and speed up settlement of claims;
Reducing approval times for new products;
Coordinating policy solutions across different ministries;
Balancing innovation and consumer protection and privacy; and simply staying abreast of technological innovation.
The Microinsurance Network, in partnership with the Access to Insurance Initiative (A2ii) and the International Association of Insurance Supervisors (IAIS) plays a role in addressing these challenges by bringing private sector participants and insurance supervisors together three times a year at Consultative Forums, which in 2017 have focused specifically on agricultural insurance.